Accounting - Topics - Preparation of reports: classification
Classification is the division of data into classes or categories to
enable the more effective provision of information from financial reports.
Classification occurs in both records and reports.
Classification is designed to produce two outcomes-
When discussing the reasons for classification ultimately you must come
back to planning and control.
The special journals are exclusive in the data they contain, for
instance, the cash receipts journal only contains cash receipts. Within the
journal the different sources of data may also be classified. The cash
receipts may be classified according to the source of those receipts,
whether they be from cash sales, debtors or other sources.
Functional classification refers to the manner in which expenses
are grouped in the Profit and Loss statement. The expenses are
classified according to the function they perform and usually correspond to
the cost centres of the firm.
The advantages of functional classification include-
* the opportunity to delegate responsibility, for instance, the sales
manager is responsible for the sales department expenses
* the capacity to compare one cost centre with another, with that of
similar firms, to benchmarks or with targets set by the firm
* to set limits on spending for particular cost centres
* decisions may be made on the basis of information provided, such as
considering whether an increase in advertising leads to an increase in
When a group of motels gets a chance to have all their cleaning undertaken
by a central linen service an informed decision to do so can not be made
without a cost centre figure for their own cleaning costs.
Classification of the balance sheet is discussed under that heading.
Questions on classification of the balance sheet are common and often
include the need to recognise current assets and current liabilities
. The most common classification error is the treatment of a 'loan' as
being exclusively non-current.
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